Conflict Minerals. OECD Due Diligence Guidance - In Practice. Presented by: Bruce Calder VP of Consulting Services. Wednesday, December 17, 14

Transcription

1 Conflict Minerals OECD Due Diligence Guidance - In Practice Presented by: Bruce Calder VP of Consulting Services

2 Agenda Due Diligence OECD Due Diligence Guidance Checklist approach - 5 steps IPSA Audit - Role of Guidance - Managing the auditor Recommendations - Issuers - Government / Industry Q&A Webinar is 50 minutes with 10 minutes of Q&A (hopefully)

3 Claigan Conflict Minerals Services Conflict Minerals - Conflict minerals compliance RCOI (Reasonable Country of Origin) Due Diligence Conflict Minerals Report Experience - Claigan work is quoted in the SEC final rules 18 times - Claigan has testified to Congress on Conflict Minerals - Worked for - Legrand, Danaher, Smiths Medical, Smith & Nephew, Covidien, Johnson & Johnson, Hamilton Beach, Honeywell, Hach, Fluke, Moog, Edwards Lifesciences, Instrumentation Laboratory, GE, Schneider Electric, KavoKerr, Microsemi, JDSU, Agilent, Barrx, Tyco, L-3, Smart Technologies, Pelton & Crane, Cooper Surgical, Carestream, Abbott Laboratories, Atricure, CAE, Philips, Plexus, FLIR, Trojan, Deltrol Controls, LoJack, Thermo Scientific, Li- Cor, Avid, and US Commercial Service.

4 US - Conflict Minerals Publicly traded US companies are required to provide due diligence that the following metals (3TGs) in their product are not sourced from the conflict regions of the Democratic Republic of Congo (DRC) and surrounding countries - Tin - Tantalum - Tungsten - Gold US publicly traded companies are required to complete three steps - Identify usage - Perform RCOI - Perform due diligence Explained further on next slide

5 3 Steps in Section Issuer to determine whether it is subject to the requirements Necessary to the functionality or production of a product manufactured or contracted by that issuer to be manufactured 2. Issuer to conduct a reasonable country of origin inquiry regarding the origin of its conflict minerals RCOI process to determine whether or not their conflict minerals originate in the DRC or adjoining countries 3. Issuer to conduct due diligence on the source and chain of custody of its conflict minerals and provide a Conflict Minerals Report if, based on its RCOI, the issuer knows or has reason to believe, that it has necessary conflict minerals that originated in the Covered Countries and did not come from recycled or scrap sources. Only applies to those conflict minerals sourced from the DRC or adjoining countries

6 Due Diligence Due diligence is required if any of the 3TGs originate in the DRC or surrounding countries SEC Final Rule (on due diligence) - the final rule requires an issuer to use a nationally or internationally recognized due diligence framework - the only nationally or internationally recognized due diligence framework available is the due diligence guidance approved by the Organisation for Economic Cooperation and Development ( OECD )

7 OECD Due Diligence Guidance OECD Due Diligence Guidance for Responsible supply Chains of Minerals from Conflict-Affected and High-Risk Areas - Only internationally recognized standard for due diligence for conflict minerals - 5 major due diligence steps - Different requirements for upstream versus downstream users

8 Upstream versus Downstream Companies The OECD guidance covers - Two groups of entities Upstream companies Nearer the mines Mineral traders, smelters, refiners Downstream companies Nearer the end users Finished products manufacturers - And has different due diligence requirements for these two sets of entities.

9 Audit In the case of an independent private sector audit of an issuers conflict minerals report The auditor is to form an opinion on two (2) items - Whether the design of the issuer s due diligence measures as set forth in the Conflict Minerals Report is in conformity with the criteria set forth in the internationally recognized due diligence framework used by the issuer, and - whether the issuer s description of the due diligence measures it performed as set forth in the Conflict Minerals Report is consistent with the due diligence process that the issuer undertook.

10 Role of the OECD Guidance in an Audit Item 1 in the audit is to identify if the process used by the issuer conformed with the OECD Due Diligence Guidance Item 2 in the audit it to determine if the description of the process in the conflict minerals report is consistent with what the issuer did Typical real world situation - Issuer is suffering an audit because all of the smelters used by the issuer s suppliers that source from the covered countries are conflict free certified by the CFSP program - The CFSP program is outside of the bounds of the audit - The only substance the auditor has left to audit is the issuer s adherence to the OECD due diligence guidance and how the issuer s adherence is described in their conflict minerals report

11 Checklist Approach The OECD guidance is complicated but it is in steps Recommendation - Breakdown the OECD Due Diligence Guidance into a checklist - Solve each item in the checklist - Describe each checked off item in the SEC conflict minerals report Next pages are an example

12 Step 1 - OECD Due Diligence Establish strong company management systems - 5 Parts - Parts (a) and (b) below

13 Step 1 - OECD Due Diligence Establish strong company management systems - Parts (c), (d), and (e) below

14 Step 2 - OECD Due Diligence Identify and assess risk in the supply chain - 4 parts

15 Step 3 - OECD Due Diligence Design and implement a strategy to respond to identified risks - 4 parts

16 Step 4 - OECD Due Diligence Carry out independent third-party audit of supply chain due diligence at identified points in the supply chain - 2 parts

17 Step 5 - OECD Due Diligence Report on supply chain due diligence - 1 part

18 Reflecting the OECD Guidance in SEC Filing... to provide a Conflict Minerals Report that includes a description of the measures the issuer has taken to exercise due diligence on the source and chain of custody of those conflict minerals Standard practice - Identify the OECD Guidance in the SEC conflict minerals report - Described the process by following the steps as described in the OECD Due Diligence Guidance Recommendation - Be concise - Use language that matches your checklist or similar activity - Not a good time for conversation

19 DRC Conflict Free - Typical Situation Why would a company undergo an audit? Normal situation - The company or a product line is, at face value, DRC Conflict Free i.e. All of the company s smelters that source or have reason to believe source from the covered countries are CFSP certified - The company has chosen to declare DRC Conflict Free Key note - All of the smelters requiring due diligence have been audited by a third party to an industry approved protocol - So, the IPSA audit should pretty simple, right?

20 Constraining the Audit Auditors will still look at auditing the issuer s adherence to the OECD Due Diligence Guidance - Including interviews, data sampling, and opinion writing Recommendations - Checklist each point in the OECD Due Diligence Guidance - Have a document for each checklisted point - In the conflict minerals report Describe the process exactly as in the checklist Be minimalistic - Determine, internally, exactly what should be audited - Bring in your most hard nosed procurement person Cut through the hand waving / charging hourly Have the auditor to spell out exactly what they will do before engaging

21 Documentation in the Checklist Checklist each requirement Have a supporting document for each item Before engaging the auditor - You want to show them this during quoting

22 Issuer Recommendations Distill the OECD Due Diligence Guidance into a checklist Recommend you work with a specialist company for due diligence elements including - Smelter due diligence - Adherence to OECD guidance As you approach a potential audit, focus on making sure the auditors are effective and specific Do not use auditing companies for the consulting on how to comply with the OECD Due Diligence Guidance - The auditing companies have no motivation to structure your compliance to reduce auditing costs - Severe economic conflict of interest

23 Government / Industry Recommendations Standard situation - Company is DRC Conflict Free because all its smelters sourcing from the covered countries are certified by a third party to an industry standard protocol US Government - Restrict unnecessary scope creep by auditors Industry - Create or update due diligence guidance for the situation above If all of the relevant due diligence is completed by the CFSI program, why are unrelated items still under scope of the audit?

24 Claigan Conflict Minerals Services Conflict Minerals - Conflict minerals compliance RCOI (Reasonable Country of Origin) Supplier RCOI Corrected smelter list Smelter RCOI Due Diligence Conflict Minerals Report Experience - Claigan work is quoted in the SEC final rules 18 times - Claigan has testified to Congress on Conflict Minerals bruce.calder@claigan.com Q&A